Broadgate Corporate Finance Blog

Pension Managers Cannot Get Enough Private Equity

One of my loyal readers from Private Equity Intelligence recently asked my thoughts about an article in his company's newsletter. I have been approached by his company several times for information about our funds. While I have always declined to dislose this information, I thought I would give them a plug for their efforts and because I do enjoy reading their newsletter from time to time.

Before I begin, I will first say that I do not use products from companies such as PEI. I think that they can help a fund get new limited partners and better market themselves in a competitive fundraising environment. However, at our funds, we only take on limited partners from existing relationships. We do not actively seek new investors, rather we take on people that come to us from prior relationships. We have always felt that this creates a stronger family of partners that is less litigious and into private equity for the long haul.

Now, back to the topic, one article from PEI's Spotlight Newsletter in their September issue highlights the fact that many LPs cannot meet their allocations to private equity. What this reveals is what many people don't know - that the largest pension funds are flush with cash and looking to put money to work. All it takes is the right set of connections, right marketing people, and the right management pedigree to raise a large amount of money very quickly. Some great managers have literally been able to get commitments of several hundred million in a few weeks. In these lift-outs from managers of already established firms, there is a clear correlation between amount of funds raised and the track record of the newly independent manager.

The main problem for these large investors is that they cannot find enough good deals to accomodate their need for large allocations. There simply are not enough good mega-fund managers. You could list probably 10 firms that can raise $10B plus worldwide. In the buyout world, there really are not enough managers with expertise in handling even a $1B plus fund.

If you think about it, there are very good reasons for this. The lineage of buyout funds can only be traced back thirty years or so. So every good manager has lineage from that small handful of early buyout pioneers. In every other sector of private equity other than buyout and real estate, it is especially difficult for managers to handle large sums. The venture investor is terrible with a $1B plus fund because large early valuations do not scale well with small startups. Similarly, the hedge investor has trouble placing these huge bets because so much leverage is involved and they would undoubtedly manipulate the market with that much flow.

Some people say that the breakneck pace of fundraising cannot continue and that someday soon the private equity party will end. As you can see, this is not true. The capacity of pension funds to fund private equity is underestimated. There will always be hungry investors with an appetite for private equity - that is because these investments drive most of their pension returns.

From James Chen's Pure VC Blog

posted by Michael Anders @ 9:11 AM